Inflation and Ukraine tensions jolt U.S. stocks

Stocks slumped on Friday, falling sharply in afternoon trading as the threat of a possible Russian invasion of Ukraine piled on to mounting concerns about U.S. inflation. 

Financial markets dived around 1:30 p.m. Eastern time, with losses for the S&P 500 nearly tripling in about half an hour. Similar downdrafts swept through other markets as investors pulled money out of riskier assets like stocks in favor more stable investments like bonds and gold.

The S&P 500 slid after the White House encouraged all U.S. citizens to leave Ukraine in the next 24 to 48 hours, before possible military action by Russia. The index lost 85 points on the day, or 1.9%, to close at 4,419. The Dow fell 1.4%, while the tech-heavy Nasdaq Composite dropped 2.8%, capping a loss for both indexes this week.

The declines are the latest sharp veers in what's already been a tumultuous 2022 for markets. Wall Street has been shaking as investors come to grips with a Federal Reserve forced to aggressively remove the low interest rates that markets love due to high inflation.

Tensions have been simmering for a while about possible military action by Russia, and U.S. national security adviser Jake Sullivan said Friday that the U.S. did not have definitive information that Russian President Vladimir Putin had ordered an invasion. But he also said that "the threat is now immediate enough that prudence demands that it is the time to leave now" for Americans in the country.

U.S. Defense Secretary Lloyd Austin on Friday ordered 3,000 troops based at Fort Bragg, North Carolina, to Poland, according to a senior defense official. The troops are expected to leave over the next couple days and be in place by early next week. That's in addition to 2,000 U.S. troops that have already been deployed from the U.S. to the region, as well as troops already stationed in Europe who are being repositioned. 

Russia is one of the world's largest energy producers, and the warnings gave oil prices an immediate jolt. Brent crude, the international standard, rose 3.3% to settle at $94.44 barrel amid the possibility that violence could disrupt supplies. U.S. crude rose 3.6% to settle at $93.10 per barrel.

Rising crude have lifted gasoline prices in the U.S. to their highest level since 2014, with the average price of a gallon of gas at $3.47 this week according to AAA, up eight cents from the previous week

Gold also rose, gaining about $20 in 20 minutes during the afternoon to top $1,860 per ounce, as investors searched for safety.

A similar rush for stability also drove investors in Treasury bonds, which in turn lowered their yields. The 10-year Tresaury yield fell to 1.93% after from roughly 2.03% earlier in the afternoon.

For bonds, it's a sharp U-turn for yields after steadily marching higher on expectations that the Fed will raise rates more often and by a sharper degree this year than expected. Just a day earlier, the 10-year yield topped 2% for the first time since 2019.

Forecasts for a more aggressive Fed got a huge jolt on Thursday, when a report on inflation came in hotter than expected and showed that inflation was at a 40-year high. The Fed can slow the economy and inflation by raising interest rates, something it hasn't done since 2018, but higher rates also put downward pressure on stocks and other investments.

"By pushing energy prices even higher, a Russian invasion would likely exacerbate inflation and redouble pressure on the Fed to raise interest rates," said Bill Adams, chief economist for Comerica Bank, said in an email. "From the Fed's perspective, the inflationary effects of a Russian invasion and higher energy prices would likely outweigh the shock's negative implications for global growth."

Much of the market's volatility in early 2022 has centered around events related to the Fed and inflation. Besides Thursday's report on inflation, other flashpoints included the release of the minutes of a Fed policy meeting that said it may reverse its bond-buying program earlier than expected.

The market also shuddered earlier this month after Facebook's parent company reported surprisingly weak results for its latest quarter, threatening the belief that continued profit growth can help stocks power through the downward pressures created by higher rates.

Markets will likely remain volatile as the Fed moves closer to raising rates and investors gauge the impact.

"What we're going through is likely going to continue in the short run," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

The prospect for violence in Ukraine only adds more uncertainty, though some on Wall Street said it will likely ultimately recede in importance to markets.